Particularly important for determining the gross mitigation costs is the magnitude
of emissions reductions required in order to meet a given target, thus the emissions
baseline is a critical factor. The growth rate of CO2 depends on
the growth rate in GDP, the rate of decline of energy use per unit of output,
and the rate of decline of CO2 emissions per unit of energy use.

In a multi-model comparison project that engaged more than a dozen modelling
teams internationally, the gross costs of complying with the Kyoto Protocol
were examined, using energy sector models. Carbon taxes are implemented to lower
emissions and the tax revenue is recycled lump sum. The magnitude of the carbon
tax provides a rough indication of the amount of market intervention that would
be needed and equates the marginal abatement cost to meet a prescribed emissions
target. The size of the tax required to meet a specific target will be determined
by the marginal source of supply (including conservation) with and without the
target. This in turn will depend on such factors as the size of the necessary
emissions reductions, assumptions about the cost and availability of carbon-based
and carbon-free technologies, the fossil fuel resource base, and short- and
long-term price elasticities.

With no international emission trading, the carbon taxes necessary to meet
the Kyoto restrictions in 2010 vary a lot among the models. Note from Table
TS.416
that for the USA they are calculated to be in the range US$76 to US$322, for
OECD Europe between US$20 and US$665, for Japan between US$97 and US$645, and
finally for the rest of OECD (CANZ) between US$46 and US$425. All numbers are
reported in 1990 dollars. Marginal abatement costs are in the range of US$20-
US$135/tC if international trading is allowed. These models do not generally
include no regrets measures or take account of the mitigation potential of CO2
sinks and of greenhouse gases other than CO2.

However, there is no strict correlation between the level of the carbon tax
and GDP variation and welfare because of the influence of the country specifics
(countries with a low share of fossil energy in their final consumption suffer
less than others for the same level of carbon tax) and because of the content
of the policies.

The above studies assume, to allow an easy comparison across countries, that
the revenues from carbon taxes (or auctioned emissions permits) are recycled
in a lump-sum fashion to the economy. The net social cost resulting from a given
marginal cost of emissions constraint can be reduced if the revenues are targetted
to finance cuts in the marginal rates of pre-existing distortionary taxes, such
as income, payroll, and sales taxes. While recycling revenues in a lump-sum
fashion confers no efficiency benefit, recycling through marginal rate cuts
helps avoid some of the efficiency costs or dead-weight loss of existing taxes.
This raises the possibility that revenue-neutral carbon taxes might offer a
double dividend by (1) improving the environment and (2) reducing the costs
of the tax system.

Note: The results of the
Oxford model are not included in the ranges cited in the TS and SPM because
this model has not been subject to substantive academic review (and hence
is inappropriate for IPCC assessment), and relies on data from the early
1980s for a key parametization that determines the model results. This model
is entirely unrelated to the CLIMOX model, from the Oxford Institutes of
Energy Studies, referred to in Table TS.6.

EMF-16. GDP losses (as a percentage of total GDP) associated with complying
with the prescribed targets under the Kyoto Protocol. Four regions include
USA, OECD Europe (OECD-E), Japan, and Canada, Australia and New Zealand
(CANZ). Scenarios include no trading, Annex B trading only, and full global
trading.

One can distinguish a weak and a strong form of the double dividend. The weak
form asserts that the costs of a given revenue-neutral environmental reform,
when revenues are devoted to cuts in marginal rates of prior distortionary taxes,
are reduced relative to the costs when revenues are returned in lump-sum fashion
to households or firms. The strong form of the double-dividend assertion is
that the costs of the revenue-neutral environmental tax reform are zero or negative.
While the weak form of the double-dividend claim receives virtually universal
support, the strong form of the double dividend assertion is controversial.

Where to recycle revenues from carbon taxes or auctioned permits depends upon
the country specifics. Simulation results show that in economies that are especially
inefficient or distorted along non-environmental lines, the revenue-recycling
effect can indeed be strong enough to outweigh the primary cost and tax-interaction
effect so that the strong double dividend may materialize. Thus, in several
studies involving European economies, where tax systems may be highly distorted
in terms of the relative taxation of labour, the strong double dividend can
be obtained, in any case more frequently than in other recycling options. In
contrast, most studies of carbon taxes or permits policies in the USA demonstrate
that recycling through lower labour taxation is less efficient than through
capital taxation; but they generally do not find a strong double dividend. Another
conclusion is that even in cases of no strong double-dividend effect, one fares
considerably better with a revenue-recycling policy in which revenues are used
to cut marginal rates of prior taxes, than with a non-revenue recycling policy,
like for example grandfathered quotas.

In all countries where CO2 taxes have been introduced, some sectors
have been exempted by the tax, or the tax is differentiated across sectors.
Most studies conclude that tax exemptions raise economic costs relative to a
policy involving uniform taxes. However, results differ in the magnitude of
the costs of exemptions.

8.4 Distributional Effects of Carbon Taxes

As well as the total costs, the distribution of the costs is important for
the overall evaluation of climate policies. A policy that leads to an efficiency
gain may not be welfare improving overall if some people are in a worse position
than before, and vice versa. Notably, if there is a wish to reduce the income
differences in the society, the effect on the income distribution should be
taken into account in the assessment.

The distributional effects of a carbon tax appear to be regressive unless the
tax revenues are used either directly or indirectly in favour of the low-income
groups. Recycling the tax revenue by reducing the labour tax may have more attractive
distributional consequences than a lump-sum recycling, in which the recycled
revenue is directed to both wage earners and capital owners. Reduced taxation
of labour results in increased wages and favours those who earn their income
mainly from labour. However, the poorest groups in the society may not even
earn any income from labour. In this regard, reducing labour taxes may not always
be superior to recycling schemes that distribute to all groups of a society
and might reduce the regressive character of carbon taxes.